Download Climate Change Briefing: Questions for Directors to Ask

Climate Change
Briefing
QUESTIONS FOR DIRECTORS TO ASK
Alan Willis • Sarah Keyes
Climate Change
Briefing
QUESTIONS FOR DIRECTORS TO ASK
Alan Willis • Sarah Keyes
DISCLAIMER
This paper was prepared by the Chartered Professional Accountants of Canada
(CPA Canada) as non-authoritative guidance.
CPA Canada and the authors do not accept any responsibility or liability that might
occur directly or indirectly as a consequence of the use, application or reliance on
this material.
Library and Archives Canada Cataloguing in Publication
Willis, Alan, author
Climate change briefing : questions for directors to ask / Alan Willis
and Sarah Keyes. -- 2nd edition.
Revision of: Climate change briefing : questions for directors to ask / written
by Julie Desjardins, Alan Willis. -- Toronto : Chartered Accountants of
Canada, ©2009.
Includes bibliographical references.
ISBN 978-1-5254-0053-7 (PDF)
1. Climatic changes--Economic aspects--Canada. 2. Climatic changes--Risk
assessment--Canada. 3. Industrial management--Environmental aspects--Canada.
I. Keyes, Sarah (Accountant), author II. Canadian Institute of Chartered Accountants,
issuing body III. Title.
HC79.E5W48 2017658.4’083C2017-901607-5
Copyright © 2017 Chartered Professional Accountants of Canada
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iii
Preface
Chartered Professional Accountants of Canada (CPA Canada) is committed to
improving corporate governance. The purpose of this Briefing is to help company directors better understand the business impacts and governance issues
arising from climate change.
Climate change is a pressing global issue affecting all companies, public and
private, with wide-ranging implications for shareholder value, strategy, risk
management and financial performance. Business executives are assessing and
acting on the strategic and risk management implications of climate change
issues, and directors are giving them more attention in their oversight role.
This Briefing explores these issues and sets out questions that directors might
ask about climate change. While we direct our discussion to company directors,
this Briefing may also help management understand the board’s and their own
role in anticipating, assessing and managing the risks and opportunities that
climate change can bring.
This is the second edition of a publication first written by Julie Desjardins and
Alan Willis and published in 2009 by the Canadian Institute of Chartered
Accountants. CPA Canada acknowledges the outstanding contribution of
these authors to enhance understanding of the risks and opportunities of climate
change for Canadian businesses and the role directors play in overseeing how
companies manage climate change-related issues.
Tom Peddie, FCPA, FCA
Chair, Corporate Oversight and Governance
Authors
Alan Willis, CPA, CA
Sarah Keyes CPA, CA
iv
Climate Change Briefing — Questions for Directors to Ask
Corporate Oversight and Governance Board
Thomas Peddie, FCPA, FCA, Chair
Hugh Bolton, FCPA, FCA
John Caldwell, CPA, CA
Andrew Foley, J.D.
Carol Hansell, LL.B., MBA, F.ICD
Kathleen O’Neill, FCPA, FCA, ICD.D
Ian Smith, MBA
Robert Strachan, FCPA, FCMA, C.Dir
John Walker, CPA, CA, LL.B.
Richard Wilson, HBA
Project Direction, CPA Canada
Gigi Dawe, LL.M.
Director, Corporate Oversight and Governance
Research Guidance and Support Group
Gordon Beal, CPA, CA, M.Ed.
Vice-President, Research, Guidance and Support
The content in this publication was researched, developed and finalized
in 2016.
v
Table of Contents
Executive Summary
1
Climate Change — A Business Issue
7
Adaptation and Mitigation
13
Risks and Risk Management
19
Strategy 25
Financial Impact
29
Information and Reporting
31
Corporate Governance
37
Summary
39
Appendix: Key Facts about Greenhouse Gas Emissions
41
Where to Find More Information
47
About the Authors
51
1
Executive Summary
Climate change is one of the biggest risks facing businesses, economies and
societies around the world today, in terms of both likelihood and severity of
potential impact. The physical effects of climate change are clearly evident,
and these have implications for a business’s strategy, competitiveness, risk
management, reputation and resilience. Many businesses already feel the
impact of climate change on operations, financial results and prospects for
future value creation.
At the 21st session of the Conference of the Parties (COP21) meeting1 in Paris
in December 2015, 195 countries agreed to reduce greenhouse gas (GHG) emissions, adding momentum to global commitments to keep climate change in
check. On Oct. 5, 2016, Canada formally ratified the Paris Agreement, along
with the European Union (EU), India & Nepal, causing the Agreement to enter
into force on Nov. 4, 2016. The Paris Agreement highlights the vital role of
business and investors in driving progress toward meeting international goals.
As a mainstream business issue, climate change presents both opportunities
and challenges for companies. Attention to issues related to climate change
is inescapable in a prudent board’s oversight of risk, strategy, financial performance and reporting. Directors need to understand the company’s business
and how climate change may re-shape it.
There are two broad categories of climate change issues:
1. Adaptation issues require management to take action to minimize and
respond to the effects of climate change on the business. These actions
may present strategic opportunities and competitive advantage for
some companies.
1
For a summary of the conference and the Paris agreement, see: http://newsroom.unfccc.int/
unfccc-newsroom/finale-cop21
2
Climate Change Briefing — Questions for Directors to Ask
2. Mitigation issues require management to take action to reduce GHG
emissions attributable to a company’s operations, products and services.
Mitigation actions are often driven by government regulation, as well as
by voluntary commitments that companies make to gain competitive
advantage, save costs or respond to external stakeholder pressure. While
mitigation may add expenses, it can also create opportunities for costsaving and innovation.
The financial impact of adaptation and mitigation actions varies among
companies, depending on their nature and circumstances. The impacts and
severity of adaptation and mitigation also affect different industry sectors in
different ways.
Canadian companies with international operations may be subject to mandated
GHG reduction, reporting or carbon trading requirements in jurisdictions outside of Canada, such as the EU. Companies doing business in the United States
are increasingly likely to be affected by GHG emissions regulations, including
mandatory GHG reporting requirements, introduced by several US states and
the US federal government.
Several Canadian provinces have already implemented climate change regulations, and following the Paris Agreement, the regulatory landscape will likely
evolve provincially, federally and internationally. Although approaches will
differ among jurisdictions, the objective of the regulations is to put a price
on carbon.
For boards of directors, the bottom line is that there are several potential business impacts that they need to be aware of and anticipate. In particular, for
example, climate change can affect:
• continuity of business operations and supply chain interruptions
• changes in demand for products and services
• access to and cost of capital
• access to and cost of insurance
• new capital expenditure considerations
• inter-jurisdictional operating complexity
• mergers, acquisitions and divestitures
This Briefing explores the impacts of climate change and their business implications in more detail. It also explores related laws and regulations and the
growing interest that investors and other providers of financial capital are
showing in companies’ climate change responses.
Executive Summary
Throughout this document are questions for directors to ask about how climate
change is affecting the company, its business and its outlook. The complete list
of these questions is as follows.
Summary of Questions for Directors to Ask
Climate Change — A Business Issue
Q1:
How are climate change issues likely to affect the company’s business,
operations and value creation in the foreseeable future?
Q2:
What are the magnitude, sources and nature of the company’s
GHG emissions?
Risks and Risk Management
Q3:
What is the strategy for responding to physical risks arising from
climate change?
Q4: What is the likelihood and impact of changes in demand for the company’s products and services due to climate change, and their implications
for its business model?
Q5:
What are the effects of existing or potential future government regulations in key operating jurisdictions?
Q6: What are the reputational risks related to the company’s approach
to dealing with and communicating about climate change issues?
Q7:
What are the legal or other actions, such as shareholder proposals and
resolutions, that exist or may exist related to the company’s response to
climate change?
3
4
Climate Change Briefing — Questions for Directors to Ask
Strategy
Q8: In terms of risks and opportunities, what is the potential impact of
climate change adaptation and mitigation on the company’s business
model and strategic plans?
Q9: What are the company’s strengths, weaknesses, opportunities and
threats that influence strategic responses to climate change issues?
Q10: What innovation- and technology-related opportunities have been
investigated to reduce GHG emissions or adapt to climate change?
Q11: How does management assess the difficulty of meeting GHG emission
reduction targets, and how is progress monitored and reported?
Q12: How could climate change issues affect capital investment, asset
management and merger, acquisition and divestiture plans?
Financial Impact
Q13: How has the current and potential future impact of climate change
issues (including carbon pricing) on revenues, expenditures and cash
flows been determined?
Q14: How has the impact that climate change issues have and could have on
the company’s financial condition, liquidity and long-term value creation
been determined?
Information and Reporting
Q15: How is reliable and timely GHG emission and other climate change
information gathered for management decision-making and disclosures
to capital markets and governments?
Q16: Do the company’s disclosures fairly present the information that investors need to assess the impact of climate change on the company’s
performance and future prospects?
Q17: How is materiality of climate change issues assessed, and are disclosures
made in the financial statements, the MD&A and (if applicable) the AIF
consistent with this assessment?
Executive Summary
Q18: How does management ensure that information reported on corporate websites or in voluntary reports is consistent with that provided
in government filings and continuous disclosure filings with securities
regulators?
Corporate Governance
Q19: Do the board’s structure and the knowledge and skillsets of board
members enable appropriate oversight of climate change issues?
Q20: How does the company’s executive compensation system support the
integration of climate change issues into organizational decision-making
and performance?
5
7
Climate Change — A Business Issue
Climate change, already a significant challenge for many companies, is a principal risk facing businesses, economies and societies around the world today, in
terms of both likelihood and severity of potential impact. The World Economic
Forum’s (WEF) Global Risk Report 20162 says, “[A]fter its presence in the top
five most impactful risks for the past three years, the failure of climate change
mitigation and adaptation has risen to the top and is perceived in 2016 as the
most impactful risk for the years to come.”
The WEF defines this risk as failure by governments and businesses to enforce
or enact effective measures to mitigate climate change, protect populations
and help businesses affected by climate change to adapt. Climate change is
connected with the risks of global water and food crises. Also near the top of
the WEF’s list is the risk of extreme weather events causing major property,
infrastructure and environmental damage — as well as human loss.
The Paris Agreement on Climate Change
“The adoption of the Paris Agreement on 12 December 2015 by
195 governments is a major turning point in the global fight against
climate change … In the coming months and years, the impact of the
Paris Agreement will be felt in board rooms, banks and stock exchanges
across the world …
One of the innovations that emerged from Paris was the official recognition of the role played by business, investors, cities and provinces in
driving and delivering climate action.”
— WEF Global Risk Report 20163
2
www3.weforum.org/docs/Media/TheGlobalRisksReport2016.pdf
3
See note 2.
8
Climate Change Briefing — Questions for Directors to Ask
Q1.
How are climate change issues likely to affect the company’s
business, operations and value creation in the foreseeable future?
While climate change is intrinsically environmental, it has wide-ranging
business, economic and social effects. For businesses, climate change can
be inextricably linked to corporate strategy, risk, opportunity, financial performance and shareholder value. Many companies are already experiencing
its impacts, which affect different sectors in different ways and to different
degrees.4
A company’s management assesses and acts on the strategic and risk management implications of climate change for business operations, financial
performance and future prospects. The company’s effectiveness in recognizing
and addressing climate change issues is likely fundamental to achieving longterm business goals and value creation.
External stakeholder expectations and concerns about adverse effects on a
company’s brand, reputation and competitiveness can also spur senior management to address climate change risks. Investors, particularly institutional
ones, recognize that a company’s response to climate change (or lack thereof)
can affect its long-term financial performance and prospects for value creation.
Investor interest in and engagement with boards and management on these
matters is rising significantly.
4
Including financial institutions (banks, insurance companies and pension funds) — see
report by Global Risk Institute, July 2016 http://globalriskinstitute.org/publications/
climate-change-why-financial-institutions-should-take-note
Climate Change — A Business Issue
The diagram below shows the potential impacts climate change can have on
a company:
Providers of
Financial Capital
(investors, lenders,
insurers)
Understand
Mitigation-related
Risks, Challenges
& Opportunities
Create
Understand
Disclosure,
Engagement, Decisions
Impact
Strategy,
Risk, Resilience
& Competitiveness
Operations, Results
& Value Creation
Impact
Impact
Adaptation-related
Risks, Challenges
& Opportunities
Create
Laws & Regulations
about GHG Emissions,
Building Codes, etc.
This Briefing discusses the business implications of climate change, as well
as the impacts of relevant laws and regulations and the growing interest that
investors and other providers of financial capital are showing in companies’
climate change responses. Attention to climate change issues should be integral to a prudent board’s oversight of strategy, risk, financial performance and
reliable, timely reporting.
Q2. What are the magnitude, sources and nature of the company’s
GHG emissions?
The Paris meeting5 of the United Nations Framework Convention on Climate
Change in December 2015 reinforced the importance of urgent action by the
private sector as well as governments in achieving any country’s emissions
reduction commitments. Business and investor coalitions worldwide support
the agreement’s implementation. It reduces uncertainty about the global path
forward to address climate change and includes the increased likelihood of “a
5
See note 1.
9
10
Climate Change Briefing — Questions for Directors to Ask
price on carbon.”6 The agreement has been called “a watershed moment for
the global economy,” causing companies to fundamentally re-examine their longterm strategy to ensure competitive advantage in restructured world markets.7
In Canada, several provinces have already introduced various types of regulations concerning companies’ GHG emissions (see “Government regulations”
on page 15). These regulations put a price on carbon, either through a direct
tax or a cap-and-trade system. Further, the federal government announced
its commitment to establish a national carbon price across all provinces and territories, starting at a minimum of $10 a tonne in 2018, rising by $10 a tonne
each year to $50 a tonne by 2022.8 In some sectors, current and anticipated
government regulations for reducing GHG emissions are heightening the need
to address climate change.
In a rising number of sectors, such as renewable energy and energy efficiency,
responding to climate change can also represent a source of opportunity. Companies of all types and sizes are working to confront climate change challenges
with innovative solutions that increase competitiveness and build resilience.
“Climate change is one of the most complex challenges facing business
and governments. At Hewlett Packard Enterprise, we believe that by
uniting people, ideas and technology, we can help solve many of the
world’s challenges, including climate change. The way we respond will
have a profound and permanent impact on the health and prosperity
of future generations.”
— Meg Whitman, President & CEO, Hewlett Packard Enterprise
(in CDP Global Climate Change Report 2015)
6
See, for example, www.unglobalcompact.org/take-action/action/cop21-business-action
7
www.wemeanbusinesscoalition.org/sites/default/files/The-Paris-Agreement_Z-Card_0.pdf
8
www.cbc.ca/news/politics/canada-trudeau-climate-change-1.3788825
Climate Change — A Business Issue
Implications for Directors’ Oversight
As a mainstream business issue, climate change presents important opportunities and challenges for companies and requires ongoing attention by directors
in their oversight of risk, strategy, resource allocation, financial performance
and reporting.
In carrying out their oversight role, directors need a thorough knowledge and
understanding of the company’s business and how climate change may affect
it. In particular, directors need to enhance their understanding of:
• business issues arising from climate change, including relevance and
significance to the core operations and value chain
• how climate change issues influence a company’s risk management
and strategy and can create opportunities
• current and potential future impacts on the company’s financial performance
• the various ways in which GHG emissions regulations can place a price on
carbon and the associated financial implications
• external communications needed to inform investors and other stakeholders about the company’s strategy to address climate change issues in the
short and long terms
• the adequacy of the company’s information systems and related internal
controls for managing and communicating on climate change issues
Boards should review and consider the suitability of their governance structure
to address climate change. The alignment of executive compensation plans
with the achievement of long-term strategic priorities, as well as achievement
of shorter-term climate change mitigation and adaptation objectives, all need
to be considered by the board.
“Generating sustainable returns over time requires a sharper focus not
only on governance but also on environmental and social factors facing
companies today. These issues offer both risks and opportunities but
for too long, companies have not considered them core to their business — even when the world’s political leaders are increasingly focused
on them, as demonstrated by the Paris Climate Accord. Over the long
term, environmental, social and governance issues — ranging from climate
change to diversity to board effectiveness — have real and quantifiable
financial impacts.”
— Larry Fink, Blackrock, Letter to CEOs, February 2016
11
13
Adaptation and Mitigation
Whether a company is concerned with climate change mitigation, adaptation or
both depends on the unique characteristics and circumstances of the organization, including its sector and value chain. Climate change issues affect some
industries and companies more than others.
Climate Change Adaptation
Adaptation issues require management to take action to minimize and respond
to the effects of climate change on the business. These issues may present strategic opportunities and competitive advantage for some companies.
The operations of many companies may be affected by climate change, whether
or not they emit large amounts of GHGs. Adaptation issues facing a company
or industry may be readily apparent, emerge over time, or accumulate. In some
cases, climate change can affect an entire industry, creating a series of interlinked
risks and opportunities for all companies operating in that sector.
Examples — Climate Change Impacts on Selected Sectors
Sector
Possible Impacts
Agriculture
•
•
seeding dates
crop variety choices
Forestry
•
spread of pine beetle epidemic due to lack of continuous
cold winters
Insurance
•
rise in number and severity of natural disasters and extreme
weather events
Shipping
•
opening of previously ice-bound northern sea routes
14
Climate Change Briefing — Questions for Directors to Ask
Examples — Climate Change Impacts on Selected Sectors
Sector
Possible Impacts
Utilities, telecommunications and
real estate
•
exposure of facilities to increased severe weather events
Oil and gas
•
•
exposure of offshore facilities to increased severe weather events
water scarcity
Mining
•
impact of melting of permafrost on access roads and on
seepage from tailings ponds
Recreation and
tourism
•
•
impact on ski resorts, recreational fishing
new northern tourism opportunities
Fishing
•
sensitivity of salmon to temperature change in spawning areas
Climate Change Mitigation
Mitigation issues require management to take action to reduce GHG emissions9
attributable to a company’s operations, products and services. Companies may
be prompted to reduce GHGs by regulatory requirements (see “Government
regulations” below) or voluntarily in response to demands from environmental
non-governmental organizations, customers, supply chains, institutional investors and other stakeholders.
Canadian business sectors that produce significant direct GHG emissions include:
• oil and gas production, transmission and distribution
• coal, oil and gas electricity generation
• building construction and operation
• transportation
• agriculture
• mining and manufacturing, such as chemicals, fertilizers, pulp and paper,
smelting and refining, including aluminum, steel, cement, lime and glass
In other sectors, such as consumer goods and information technology, GHG
emissions may be produced indirectly through their supply chains.
9
See Appendix: Key Facts About Greenhouse Gas Emissions.
Adaptation and Mitigation
Reducing GHG emissions often involves upfront costs, such as retrofitting plant
and equipment or changing the logistics of delivery systems. These costs may
be offset by cost savings from improving energy efficiency or generating tradable carbon permits.
Reducing GHG emissions can also open opportunities for companies to develop
and use new technologies, products and services. These activities can produce innovative solutions that can be sold to other companies, creating new
revenue streams. Swift action by a company to reduce GHG emissions from
production and distribution processes can give leaders a competitive advantage over laggards.
Government Regulations
Following the adoption of the Paris Agreement by 195 countries in December 2015, the regulatory landscape is rapidly evolving, both domestically and
internationally. In June 2016, Canada, the United States and Mexico announced
a North American Climate, Clean Energy and Environment Partnership. Under this
agreement, they set targets for reducing methane emissions by 40-45 per cent
by 2025 and to generate 50 per cent of their energy from renewable sources
by 2025.10 On Oct. 3, 2016, Canada’s federal government announced a national
carbon price across all provinces and territories, starting at a minimum of $10
a tonne in 2018, rising by $10 each year to $50 a tonne by 2022.11 On Oct. 5, 2016,
Canada formally ratified the Paris agreement, along with the EU, causing the
agreement to enter into force on Nov. 4, 2016, as the required threshold of
55 countries representing 55 per cent of global emissions had been passed.12
On Oct. 15, 2016, 197 countries reached a legally binding global agreement to
reduce hydrofluorocarbon (HFC) emissions.13
Such political moves can have immediate and long-term implications for companies. Companies with international operations may be subject to mandated
GHG reduction, reporting or carbon trading requirements in other jurisdictions.
For example, companies doing business in the United States are increasingly
likely to be affected by state and federal GHG emissions regulations, including
mandatory reporting requirements. It is important for directors to stay aware
of evolving climate change policies and regulations in the jurisdictions where
the company operates.
10 http://pm.gc.ca/eng/news/2016/06/29/leaders-statement-north-american-climate-clean-energy-and
-environment-partnership
11
See note 7.
12 http://unfccc.int/paris_agreement/items/9444.php
13 www.cbc.ca/news/world/hydrofluorocarbons-agreement-1.3806786
15
16
Climate Change Briefing — Questions for Directors to Ask
Potential Business Impacts
The costs of managing climate change risk and capitalizing on opportunities
may cause companies to defer action, especially if they face financial difficulties, challenging market conditions or fluctuating foreign exchange rates. For
some companies and industries, addressing the business impacts of climate
change may be unavoidable, even in troubled times. Climate change can affect:
•
Continuity of business operations: Extreme weather events can cause
operational interruptions and make key inputs, such as energy or parts
from suppliers, unavailable. Mitigating these risks may require modifications
to property, plant or equipment or relocation of facilities.
•
Changes in demand for products and services: Changing consumer preferences, supply chain pressures or technological developments driven by
climate change opportunities or challenges may change the level and timing of demand for a company’s products and services.
•
Access to capital: Institutional and private investors, lenders and debt
rating agencies are increasingly interested in the financial consequences
of current and future climate change impacts, including compliance with
regulatory requirements. These stakeholders are increasingly aware of
companies and industries with high exposure to climate change risks, and
they are engaging with management and boards about how their companies assess and respond to climate change issues. Investors are also
collaborating to explore their role and responsibilities in addressing global
and domestic climate change issues and implementing the Paris agreement.
•
Access to insurance: The impacts of climate change are likely to affect the
affordability and availability of insurance.14 New climate change-related
insurance products are being introduced. Insurers are excluding climate
change risks in their policies and encouraging their customers to evaluate
these risks.15
•
New capital expenditure considerations: Some capital expenditures may
become more financially viable due to climate change as other capital projects become less attractive. Concerns about future commodity demand
or GHGs from fossil fuel extraction, transmission and use may alter the
economics of proposals to build facilities and pipelines. The ability to trade
14 For example, the frequency and severity of extreme weather events may affect the cost of insuring oil rigs.
15 www.rmc-agr.com/potential-effects-of-climate-change-on-liability-insurance
Adaptation and Mitigation
emissions reduction credits adds a new dimension to capital expenditure
decision-making, especially in the oil and gas sector, affecting hurdle rates
and changing the relative attractiveness of capital investments.
•
Inter-jurisdictional operating complexity: Companies that operate in
multiple jurisdictions may have to deal with a variety of climate change
regulations and emissions trading systems, each with different rules,
risks and opportunities. This complicates regulatory compliance and
its oversight.
•
Decisions about mergers, acquisitions and divestitures: Climate change
risk, opportunity and impacts on valuation are introducing new layers of
complexity to mergers, acquisitions and divestitures, driving deals forward
in some cases and discouraging them in others.
17
19
Risks and Risk Management
As leading sources of risk facing companies, societies and economies today,
climate change and extreme weather events comprise principal business risks
that should be subject to board oversight. Directors are increasingly focused
on ensuring climate change-related risks are appropriately included within the
scope of existing enterprise risk management systems.
Climate risk is ubiquitous. SASB research demonstrates that 72 out
of 79 Sustainable Industry Classification System (SICS™) industries
are significantly affected in some way by climate risk. This equates to
$27.5 trillion, or 93 per cent of United States equities by market capitalization. This represents a systematic (sic) risk …
— SASB Climate Risk Technical Bulletin # TB001 - 1018201616
General Categories of Risks
Climate change risks may be viewed as falling into five categories: physical,
business model, regulatory, reputational and litigation.
Physical Risks
Q3. What is the strategy for responding to physical risks arising from
climate change?
A company’s operations and its supply and distribution chains can be at risk
due to changing weather patterns, more frequent extreme weather events and
changes in air and ocean temperature, sea level and water availability.17
16 www.prnewswire.com/news-releases/sasb-publishes-technical-bulletin-on-climate-risk-300347452.html
17 The chart on pages 13–14 offers examples of how physical risks might affect certain sectors.
20
Climate Change Briefing — Questions for Directors to Ask
Risks Related to Business Model
Q4. What is the likelihood and impact of changes in demand for the company’s products and services due to climate change, and their implications
for its business model?
Climate change may fundamentally change market or customer demand for
a company’s products or services, and possibly the timing of when demand
occurs. Such changes may be caused by shifts in consumer preferences, such
as for “green” (i.e., low GHG) products, or by new technologies in the market
that decrease existing demand. This in turn may call for re-assessment of the
company’s business model.
For example, companies in the automotive or oil and gas sectors may face
declining demand over the longer term for products that are being replaced
by new technologies or innovative new products. Transition to a green or low
carbon economy would likely contribute to such shifts. Changes in seasonal
weather patterns — a physical risk noted above — may shift the timing of customer demand for products and services. While such shifts are not necessarily
negative, companies in affected sectors need to monitor and adapt to them
as necessary.
Other companies and industries whose products and services reduce GHG
emissions or combat climate change may see customer demand increase.
Regulatory Risks
Q5. What are the effects of existing or potential future government
regulations in key operating jurisdictions?
Companies face an uncertain, changing and fragmented regulatory environment,
with different jurisdictions introducing different approaches and regulations to
address climate change. This increases operating complexity and associated
regulatory compliance costs.
Regulations may set GHG emissions limits, trading systems and instruments
such as carbon taxes, energy and fuel efficiency standards, building codes and
environmental permits.
Risks and Risk Management
Reputational Risks
Q6. What are the reputational risks related to the company’s approach
to dealing with and communicating about climate change issues?
A company’s perceived commitment to addressing climate change issues
can positively or negatively affect intangibles, such as brand value, consumer
confidence, employee loyalty, timely regulatory approval of projects and social
license to operate.
As the impacts of climate change become more apparent, companies responsible for significant GHG emissions in production or use of their products or
services may face increasing reputational challenges, including campaigns by
environmental non-governmental organizations, activist investors and others.
Mainstream institutional investors (e.g., pension funds) are engaging with the
boards and management of companies in their portfolios on climate change
issues. Also on the rise are shareholder resolutions proposed by mainstream
institutional investors and activist investors about climate change risk management and disclosures and the provision of advice by proxy advisors on how to
vote on such resolutions — trends likely to continue in Canada and elsewhere.
In its 2016 Management Proxy Circular, Suncor Energy indicated it
would support a shareholder resolution filed by NEI Investments calling
for ongoing reporting of how it is assessing, and ensuring, long-term
corporate resilience in a future low-carbon economy.18
18 http://sustainability.suncor.com/2016/pdf/Suncor-2016-English-Management-Proxy-Circular.pdf,
see Schedule A.
21
22
Climate Change Briefing — Questions for Directors to Ask
Litigation Risks
Q7.
What are the legal or other actions, such as shareholder proposals and
resolutions, that exist or may exist related to the company’s response
to climate change?
Historically, litigation against companies related to climate change has been
limited. This could change over time as awareness rises about global threats
related to climate change on communities and investor interests.
In November 2015, the New York State Attorney General began “an
investigation of Exxon Mobil to determine whether the company lied to
the public about the risks of climate change or to investors about how
such risks might hurt the oil business.”19
In November 2016, a class action was brought against Exxon Mobil
in the US alleging that investors were misled by misreporting of risks
concerning the valuation of its oil reserves. 20 Earlier, in September, 2016,
the SEC had launched an investigation into the company’s valuation of
its oil reserves. 21
Overseeing Risk Management
Directors need to assess whether the company’s risk management strategies
are adequate and appropriate based on the risks identified and the company’s
risk tolerance.
According to CPA Canada’s A Framework for Board Oversight of Enterprise Risk
Management, “The risk management system should allow management to bring
to the board’s attention the company’s material risks and assist the board to
understand and evaluate how these risks interrelate, how they may affect the
company, and how these risks are being managed.”22
19 www.nytimes.com/2015/11/06/science/exxon-mobil-under-investigation-in-new-york-over-climate
-statements.html?_r=0
20 https://globenewswire.com/news-release/2016/11/17/891034/0/en/Lawsuit-for-Investors-in-Exxon-Mobil
-Corporation-NYSE-XOM-shares-announced-by-Shareholders-Foundation.html
21 www.reuters.com/article/us-exxon-mobil-probe-sec-idUSKCN11Q2EC
22 www.cpacanada.ca/en/business-and-accounting-resources/strategy-risk-and-governance/
enterprise-risk-management/publications/a-practical-approach-to-board-risk-oversight
23
The publication highlights the board’s need for adequate, up-to-date appreciation of the nature and sources of risks faced by the company. This includes
understanding interdependencies between risks and how events or conditions
occurring simultaneously can further increase the impacts of these risks. Directors
need to ensure that business risks are not ignored because they are considered as unlikely to occur. Collectively, boards need to have the right blend of
business and industry knowledge to assess the likelihood and potential impact
of climate change-related risks — as emphasized in “Corporate Governance”
section in this Briefing.
25
Strategy
Q8. In terms of risks and opportunities, what is the potential impact of
climate change adaptation and mitigation on the company’s business
model and strategic plans?
Climate change requires companies to position themselves for success in a
low-carbon economy. As the board is ultimately responsible for the company’s
long-term direction, it needs to ensure adequate consideration of climate issues
in its oversight of the business planning process and of major decisions about
business strategy. This may involve reassessing strategies to address climate
change risks and positioning the business to seize opportunities for competitive advantage. Increasingly, companies use “shadow pricing” of carbon and
scenario planning when evaluating the potential impacts of climate change on
business strategy. Responsible oversight requires the board’s strategic assessment to occur as risks and opportunities emerge, rather than as part of an
annual review.
Q9. What are the company’s strengths, weaknesses, opportunities and
threats that influence strategic responses to climate change issues?
As discussed in CPA Canada’s 20 Questions Boards Should Ask about Strategy,
“While boards typically focus on the overall vision and corporate strategy, important strategic issues also may exist at the level of business unit strategy and
even functional strategies. For example, decisions on product strategies and
manufacturing strategies can expose the company to significant risks and so
the board should understand the underlying issues.”23
23 www.cpacanada.ca/en/business-and-accounting-resources/strategy-risk-and-governance/
strategy-development-and-implementation/publications/20-questions-on-corporate-strategy-for-directors
26
Climate Change Briefing — Questions for Directors to Ask
Companies’ climate change strategies may also affect intangibles, such as
brand value, reputation, social license to operate, and ability to attract and
retain employees. It is important for directors to consider the company’s
strengths, weaknesses, opportunities and threats across all aspects of the
business, including its supply chain.
Q10. What innovation- and technology-related opportunities have been
investigated to reduce GHG emissions or adapt to climate change?
In response to climate change issues, companies are increasingly designing
products, developing production processes, establishing new supply chains
and creating technologies for a low-carbon future. Some companies may
need to reconsider whether their current business model will continue to
create value in the long term, especially where they anticipate shifts in
market demand or new technologies that affect their core business. Boards
may also ask about the extent to which management considered not only
risk management and GHG reduction strategies but also innovation- and
technology-related opportunities.
Q11. How does management assess the difficulty of meeting GHG emission
reduction targets, and how is progress monitored and reported?
As previously noted, Canada’s federal government has committed to a national
carbon price and several of the country’s provinces have already implemented
or are planning to implement a carbon price. Federally, all facilities emitting
annually more than a stated level of GHGs have to submit annual reports on
their emissions to Environment Canada.
With increasing regulation federally and provincially, Canadian companies need
to understand current GHG emissions and, in some cases, track and monitor
progress towards targets over time. In overseeing strategy, boards might ask
about the basis used by management to set GHG emissions reduction targets.
It is important for directors to consider GHG emission reduction targets as part
of organizational strategy, regulatory compliance and reporting.
Strategy
Q12. How could climate change issues affect capital investment, asset
management and merger, acquisition and divestiture plans?
For companies with longer operating or capital investment cycles (e.g., automotive industry, oil and gas, utilities, real estate), understanding the impact
of structural changes in capital markets arising from climate change issues is
critical. The use of new funding instruments, such as green bonds24, may need
consideration. In making long-term investments, companies must consider how
climate change adaptation and mitigation issues affect long-term capital allocation and budgeting. Further, economic factors related to climate change may
affect the relative attractiveness of a potential merger, acquisition or divestiture. Directors should understand how climate change might influence these
types of business decisions.
24 Climate bonds, also known as green bonds, are a relatively new but growing asset class. They may be
issued by governments, banks or companies in order to raise funds for climate change mitigation or adaptation related projects or programs.
27
29
Financial Impact
Q13. How has the current and potential future impact of climate change
issues (including carbon pricing) on revenues, expenditures and cash
flows been determined?
Q14. How has the impact that climate change issues have and could have on
the company’s financial condition, liquidity and long-term value creation
been determined?
How might climate change impact the company’s current finances and its
future prospects, liquidity and long-term value creation? Examples of possible
impacts on revenues and costs are set out in the table below.
Climate Change — Examples of Potential Impacts
Factors Affecting Revenue
Factors Affecting Costs
•
•
the need to retrofit property, plant and
equipment to reduce GHG emissions
•
research and development to design more
carbon-efficient operations and processes
changes in consumer demand
for goods and services due to
perceptions about the company’s GHG emissions
•
sales or licenses of innovative
low-carbon technologies
•
purchases and implementation of information
systems to measure and record GHG emissions
•
speed of obtaining regulatory
approvals
•
increased or new insurance coverage
•
sales of emissions allowances
or credits
•
purchases of emission allowances or credits
to meet regulatory requirements
•
proceeds from issuing green
bonds
•
penalties for failure to meet government
emission targets
•
changes from climate changedriven corporate restructurings
•
costs of rebuilding facilities affected
by extreme weather events
•
the possibility that assets
(e.g., oil and gas reserves) may
no longer generate revenue
•
investments in productive capacity that
embodies new energy-efficient technologies
•
investments in projects to generate offset credits
•
financing costs related to the above
expenditures
•
creation of new markets for lowcarbon products and services
31
Information and Reporting
Oversight of Information Systems and
Internal Controls
Q15. How is reliable, timely GHG emission and other climate change information gathered for management decision-making and disclosures to
capital markets and governments?
Directors need to be satisfied that management has implemented systems,
procedures and controls to gather and record reliable and timely climate
change-related information for management analysis and internal decision-making, and external disclosure to investors, governments and other
stakeholders.
Appropriate, reliable information systems and controls are necessary for continuous disclosure filings, government filings and voluntary reporting, as well as
internal reporting to senior and operational management.
Establishing data collection and reporting systems, including associated
controls, requires management commitment and dedicated resources.
Oversight of External Reporting — Mandatory
versus Voluntary
Directors need to be aware of specific issues to consider when companies
report externally on climate change matters, in both mandatory and voluntary
disclosures.
32
Climate Change Briefing — Questions for Directors to Ask
Mandatory Reporting
There are two main categories of mandatory reporting:
1. continuous disclosure reporting for publicly traded companies
2. required filings under government climate change regulations
Q16. Do the company’s disclosures fairly present the information that investors need to assess the impact of climate change on the company’s
performance and future prospects?
Canadian securities regulations require public companies to disclose information that would be material to investor decision-making, including material
environmental matters. While some public companies choose to provide climate
change-related disclosures in voluntary reports or on their company websites,
material information must be disclosed on a timely basis in securities filings.
In 2010, the Canadian Securities Administrators (CSA) published guidance25
for reporting issuers on the environmental disclosure requirements for financial statements, MD&As and Annual Information Forms (AIF). This guidance
focuses on the five major categories of risks (see the “Risk and Risk Management” section in the Briefing) and includes a section on corporate governance.
While this guidance is broadly focused on environmental matters, it encompasses consideration of climate change issues.
The CSA’s guidance explains the roles and responsibilities of audit committees
and boards for oversight of continuous disclosure filings, including climate-related
disclosures, and underlying controls and procedures. It also summarizes the
relevant CSA National Instruments regarding review, approval and CEO/CFO
certifications of these filings.
25 CSA Staff Notice 51-333 Environmental Reporting Guidance, 2010.
Information and Reporting
The Governor of the Bank of England, Mark Carney, speaking to Lloyds
of London in September 2015, revealed his idea for the Financial Stability Board (FSB) to establish a climate disclosure task force. The task
force would aim to create a single global standard for companies to
report information to investors about climate change footprint, risks
and strategies. 26
At the Paris COP21 meeting, the FSB announced the formation of the
industry-led task force on climate-related financial disclosures (TCFD),
chaired by Michael Bloomberg. The TCFD’s goal is to “develop voluntary,
consistent climate-related financial risk disclosures for use by companies in providing information to lenders, insurers, investors and other
stakeholders.”27
Carney said, “The FSB is asking the [TCFD] to make recommendations
for consistent company disclosures that will help financial market participants understand their climate related risks. Access to high quality
financial information will allow market participants and policy makers
to understand and better manage those risks, which are likely to grow
with time.”28
Regarding information reported in continuous disclosure filings, directors
should know that:
• carbon taxes, regulatory emissions reduction targets/caps and emissions
trading create transactions and obligations that need to be recognized and
disclosed in financial statements
• mainstream and private institutional investors are increasingly seeking
additional disclosures about climate change matters in mandatory and
voluntary reports
• the United States Securities and Exchange Commission (SEC) issued an
interpretive release about climate change disclosures required in the MD&A
and other parts of form 10K (20F for foreign issuers) in February 2010
• directors of reporting issuers, as well as certifying officers (i.e., CEOs
and CFOs) can face civil liability lawsuits for misrepresentations in securities filings
26 www.bankofengland.co.uk/publications/Pages/speeches/2015/844.aspx
27 www.fsb.org/2015/12/fsb-to-establish-task-force-on-climate-related-financial-disclosures
28 www.youtube.com/watch?v=JAqfg8JwASg
33
34
Climate Change Briefing — Questions for Directors to Ask
CPA Canada’s Building a Better MD&A: Climate Change Disclosures29 offers
more information about continuous disclosure filings.
Q17. How is materiality of climate change issues assessed, and are disclosures
made in the financial statements, the MD&A and (if applicable) the AIF
consistent with this assessment?
In deciding what information about climate change risks and impacts should be
disclosed, the determination of materiality is important. Directors should satisfy
themselves that management’s process for determining materiality is sound
and supportable. Boards should question the inclusion of generic boilerplate
disclosures that provide no company-specific information useful to investors,
especially if there are material risks and impacts that should be disclosed.
In some sectors, institutional investors are engaging with boards and management on the adequacy of climate change-related disclosures, which sometimes
become the focus of shareholder proposals and resolutions (see “Reputational
risks” section in this Briefing).
In 2011, the independent United States SASB was created to develop recommendations (termed “standards” by SASB) for disclosures about material
environmental, social and governance matters that SEC registrants should
provide in 10K filings.30 Following these recommendations is not mandatory,
but they may help companies decide what climate-change-related matters
are material and should be disclosed in the MD&A.
Some of the world’s stock exchanges have issued guidance and requirements
for listed companies about environmental (and social) disclosures, including
climate change disclosures. Together with the New York Stock Exchange and
many other exchanges, the TMX Group is a member of the United Nations’
Sustainable Stock Exchanges Initiative. 31 In 2014, the TMX Group’s Toronto
Stock Exchange (TSX) issued a primer,32 developed jointly with CPA Canada,
that summarizes disclosures expected from TSX-listed companies under
existing CSA regulations and staff notices.
29 www.cpacanada.ca/en/business-and-accounting-resources/financial-and-non-financial-reporting/
mdanda-and-other-financial-reporting/publications/climate-change-disclosures-in-the-mda
30 www.sasb.org
31 www.sseinitiative.org
32 See “Where to find more information.” (at end of this Briefing)
Information and Reporting
Under the second type of mandatory reporting, certain Canadian businesses
must file GHG emissions information with Canadian provincial and/or federal
governments. Directors should assess whether adequate systems, processes and
controls are in place to deliver timely and reliable information for these filings.
Companies with subsidiaries or operations in Europe or the U.K. may be
subject to mandatory GHG emissions or other climate change disclosure
requirements. In these cases, boards or audit committees may need to ask
about legal and regulatory requirements related to climate change reporting
to determine the appropriate degree of oversight.
Voluntary Reporting
Q18. How does management ensure that information reported on corporate websites or in voluntary reports is consistent with that reported
in government filings and continuous disclosure filings with securities
regulators?
Many companies volunteer information beyond what is required by laws
or regulations. Climate change information may be reported voluntarily:
• in annual reports (i.e. outside the financial statements and MD&A)
• in responses to surveys such as the CDP33
• in separate corporate sustainability and climate change reports
• on corporate websites
In these cases, directors need to satisfy themselves the information in voluntary
reports is:
• consistent with information filed in mandatory reports
• disclosed also in continuous disclosure filings on a timely basis if material
to investors
• reliable and compliant with applicable CSA requirements about forwardlooking information
33 CDP is a not-for-profit organization that runs the global voluntary disclosure system for investors,
companies, cities, states and regions to manage their environmental impacts. See www.cdp.net
35
37
Corporate Governance
Q19. Do the board’s structure and the knowledge and skillsets of board
members enable appropriate oversight of climate change issues?
The board’s structure and expertise in overseeing the management and
reporting of climate change issues are two important aspects of corporate
governance. Institutional investors are increasingly interested in evaluating,
through company disclosures and direct engagement, board structure and
competence for the oversight of company strategy and performance related
to climate change issues.
A variety of board structures are used to oversee climate change issues. Direct
oversight of climate change issues may be the responsibility of the board as
a whole, or it may be delegated to a committee of the board. Some boards assign
primary responsibility to an enterprise risk management committee, which can
be practical as long as the board can ensure that climate change risks and
adaptation and mitigation strategies are appropriately integrated with the company’s strategy and resource allocation.
Effective oversight of this area calls for boards to have a level of knowledge,
skills and experience about climate change as a business issue. When making
investment decisions, at least one major pension plan looks specifically for
boards to be climate competent. Boards should assess the knowledge, skills
and experience they need individually and collectively, depending on how
responsibilities are assigned within their board structure.
38
Climate Change Briefing — Questions for Directors to Ask
Q20. How does the company’s executive compensation system support the
integration of climate change issues into organizational decision-making
and performance?
The board should expect the compensation committee to align short- and
long-term management incentives with achievement of objectives, including
those related to management of climate change issues, regarded as key factors
in value creation.
39
Summary
Climate change presents business issues that are likely to affect value creation
in both the short and long term. Attention to climate change issues is inescapable in a prudent board’s oversight of strategy, risk, financial performance and
reliable, timely reporting.
To discharge their oversight responsibilities, boards need to satisfy themselves
that appropriate processes are in place to ensure:
• directors understand how climate change can affect physical, regulatory
and reputational aspects of the business
• climate change risk is managed by company executives with appropriate
board oversight
• consideration of risks and opportunities arising from climate change
is embedded in decision-making about strategy, capital investments
and innovative R&D
• potential impacts on the company’s revenues and expenditures, and longterm value creation, are understood and anticipated
Ongoing board vigilance — throughout the year, not just annually — is required
to keep up with the fast-evolving business impacts of climate change on current and future value creation.
41
Appendix:
Key Facts about
Greenhouse Gas Emissions
GHGs: Scientists note that certain gases act to create a giant greenhouse
around the earth by trapping heat in the atmosphere, causing the earth to
be warmer than it would be naturally. The main GHGs are as follows:
•
Carbon dioxide (CO2): Carbon dioxide is emitted naturally through the
carbon cycle and also through human activities like burning fossil fuels,
solid waste, trees and wood products, and manufacturing products (e.g.,
chemical reactions in cement making). The primary natural processes that
release CO2 into the atmosphere (sources) and that remove CO2 from the
atmosphere (sinks) are animal and plant respiration, and ocean-atmosphere
exchange, in which oceans absorb and release CO2 at the sea surface.
•
Methane (CH4): Methane sources include landfills, natural gas and petroleum systems, agricultural activities, coal mining, stationary and mobile
combustion, wastewater treatment, and certain industrial processes.
•
Nitrous oxide (N2O): Nitrous oxide sources are agricultural soil management, animal manure management, sewage treatment, mobile and
stationary combustion of fossil fuels, and certain acid production. Nitrous
oxide is also produced naturally from a wide variety of biological sources
in soil and water.
•
Fluorinated gases: Hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride are potent synthetic GHGs that are emitted through a variety of
industrial processes.34
34 The United States Environmental Protection Agency website is the source for information provided on GHGs.
42
Climate Change Briefing — Questions for Directors to Ask
Every business has processes, products or services that emit GHGs either
directly (e.g., through the burning of fuel in the company’s plant or vehicles)
or indirectly (e.g., through the use of electricity generated using fossil fuels).
GHG Emissions Inventory
A GHG emissions inventory is a quantified statement of an entity’s GHG emissions over a particular period.
There are two widely accepted methodologies for calculating an entity’s GHG
emissions inventory:
1.
The Greenhouse Gas Protocol — A Corporate Accounting and Reporting
Standard, Revised Edition, 2004, developed by the World Business Council
for Sustainable Development & World Resources Institute35
2. ISO 14064-1:2006 “Greenhouse Gases — Part 1: Specification with guidance
at the organization level for quantification and reporting of greenhouse gas
emissions and removals,” released in 2006 by the International Organization for Standardization.
An entity may be a complete organization (e.g., company), an individual installation or a facility within an organization — many regulatory requirements are
aimed at individual installations or facilities that have emissions over a particular threshold.
An emissions inventory usually:
• discloses GHGs as carbon dioxide equivalents (CO2e)36 so that the quantity
of different GHGs can be meaningfully aggregated
• calculates emissions by measuring an activity (e.g., the distance travelled
by a vehicle or the use of a particular fuel) and applying an “emission factor” that relates the measured activity to the emissions it causes, such as
what mass of each type of GHGs is emitted from combustion of a kilogram
of a particular fuel
• categorizes emissions by source (and perhaps geographical segments) and
includes notes that explain the measurement and calculation methods used
35 www.ghgprotocol.org/standards
36 The emissions of each GHG (CO2, CH4, N2O, HFC, PFC, SF6) are calculated separately and then converted
to CO2 equivalents based on their global warming potential. For example, N2O is assigned a global warming potential of 310 times that of CO2.
Appendix: Key Facts about Greenhouse Gas Emissions
The GHG Protocol offers the following broad categorization of sources
of emissions:
Stationary combustion: combustion of fuels in stationary equipment,
such as boilers, furnaces, burners, turbines, heaters, incinerators, engines
and flares
Mobile combustion: combustion of fuels in transportation devices,
such as automobiles, trucks, buses, trains, airplanes, boats, ships,
barges and vessels
Process emissions: emissions from physical or chemical processes such
as CO2 from the calcination step in cement manufacturing, CO2 from
catalytic cracking in petrochemical processing, and perfluorocarbon
emissions from aluminum smelting
Fugitive emissions: intentional and unintentional releases such as equipment leaks from joints, seals, packing and gaskets, as well as fugitive
emissions from coal piles, wastewater treatment, pits, cooling towers and
gas processing facilities
Direct and Indirect GHG Emissions37
An emissions inventory ordinarily includes direct emissions (called Scope 1
emissions in the GHG Protocol), which occur from sources that are owned
or controlled by the company. Scope 1 emissions include those from combustion in owned or controlled boilers, furnaces and vehicles and emissions from
chemical production in owned or controlled process equipment.
An emissions inventory may also include indirect emissions, which the GHG Protocol splits into Scope 2 and Scope 3 emissions:
•
Scope 2 emissions (a required reporting category under the GHG Protocol)
are GHG emissions from the generation of purchased electricity consumed
by the company. Scope 2 emissions are “indirect” because the physical
emissions associated with electricity occur at the facility where electricity
is generated, rather than at the place where the electricity is consumed.
37 The total of a company’s direct and indirect GHG emissions is sometimes referred to as its
“carbon footprint.”
43
44
Climate Change Briefing — Questions for Directors to Ask
•
Scope 3 emissions (an optional reporting category under the GHG Protocol but required under regulations in some jurisdictions and under the
CDP) result from the activities of the company but occur from sources not
owned or controlled by the company. Examples of activities that give rise
to Scope 3 emissions are employee business travel, outsourced activities,
consumption of fossil fuel or electricity required to use the entity’s products, extraction and production of materials purchased as inputs to the
entity’s processes, and transportation of purchased fuels.
Emissions Trading
Emissions trading is one mechanism to provide economic incentives for reducing emissions. It involves the transfer of ownership of an emission allowance
(cap-and-trade systems) or emission reduction credit (offset and baseline-andcredit systems) from one entity to another for monetary consideration.
Cap-and-trade system
Under cap-and-trade systems, governments establish an aggregated emissions
cap (or limit) and assign allowances to various emitters to release specified
quantities of GHGs into the atmosphere. The number of allowances (with one
allowance generally being equal to one tonne of GHG emissions) received by
an emitter is the total amount of GHGs it is allowed to emit. Companies can
sell or buy allowances. Annually, companies must remit to the government
sufficient compliance units to equal their actual GHG emissions. Over time,
governments are expected to lower the limit or cap, making allowances more
scarce and expensive.
Offset system
In an offset system, facilities, companies and individuals can create tradable
credits by developing a project to reduce GHG emissions below a baseline level
of emissions. A system regulator generally mandates specific requirements for
acceptable emission reduction projects and approves the emission reductions
before it issues tradable credits. Project-based credits, such as those under
the Clean Development Mechanism and other offset schemes, may be sold to
those who require compliance units in cap-and-trade systems.
Baseline-and-credit system
In a baseline-and-credit system, facilities can create tradable credits by reducing
their GHG emissions below a baseline level of emissions.
Appendix: Key Facts about Greenhouse Gas Emissions
Carbon Capture and Storage
Carbon capture and storage is an approach to mitigating GHG emissions that
is not yet fully researched or widely commercialized. It involves capturing and
compressing carbon dioxide and storing it in deep geological formations, in
deep ocean masses, or in the form of mineral carbonates.
45
47
Where to Find
More Information
External References
The Global Risks Report 2016
www.weforum.org/reports/the-global-risks-report-2016
Banking on 2o: The Hidden Risks of Climate Change for Canadian Banks
www.share.ca/files/SHARE_ClimateChangeandBankPaperFINAL_1.pdf
Climate Change, International Corporate Governance Network
www.icgn.org/climate-change
Climate Risk: Rising Tides Raise the Stakes
www.spratings.com/documents/20184/984172/
Insights+Magazine+-+December+2015/cff352af-4f50-4f15-a765-f56dcd4ee5c8
Managing the Business Risks and Opportunities of a Changing Climate
http://nbs.net/wp-content/uploads/Adaptation-to-Climate-Change-Primer.pdf
Risky Business: The Economic Risks of Climate Change in the United States
http://riskybusiness.org/site/assets/uploads/2015/09/RiskyBusiness_Report_
WEB_09_08_14.pdf
CDP Global Climate Change Report 2015
www.cdp.net/CDPResults/CDP-global-climate-change-report-2015.pdf
Recognizing Risk, Perpetuating Uncertainty — A Baseline Survey of Climate
Disclosures by Fossil Fuel Companies
www.carbontracker.org/wp-content/uploads/2014/10/CTI-Climate-risk
-disclosures-Report-Web.pdf
48
Climate Change Briefing — Questions for Directors to Ask
Climate Risk — SASB Technical Bulletin # TB001-10182016
http://using.sasb.org/sasb-climate-risk-framework
Building Resilience in Global Supply Chains
http://wbcsdpublications.org/wp-content/uploads/2015/12/
building-resilience-in-global-supply-chains.pdf
Competitive Advantage on a Warming Planet
https://hbr.org/2007/03/competitive-advantage-on-a-warming-planet
The Carbon Margin — Translating Carbon Exposure into Competitive Advantage
www.adlittle.de/uploads/tx_extthoughtleadership/ADL_Report_The_
carbon_margin_01.pdf
Building a Better MD&A — Climate Change Disclosures
www.cpacanada.ca/en/business-and-accounting-resources/financial-and
-non-financial-reporting/mdanda-and-other-financial-reporting/publications/
climate-change-disclosures-in-the-mda
A Primer for Environmental and Social Disclosure
www.tsx.com/resource/en/73
Climate Change: Why Financial Institutions Should Take Note
http://globalriskinstitute.org/publications/
climate-change-why-financial-institutions-should-take-note
CPA Canada Publications on Governance
(available at www.cpacanada.ca/governance)
Director Series
Framework Series
• A Framework for Board Oversight of Enterprise Risk
• Overseeing Strategy: A Framework for Boards of Directors
• Overseeing Mergers and Acquisitions: A Framework for Boards of Directors
20
•
•
•
Questions Series
20 Questions Directors Should Ask about
20 Questions Directors Should Ask about
20 Questions Directors Should Ask about
Indemnification and Insurance (2nd ed)
• 20 Questions Directors Should Ask about
Internal Audit
Building and Sustaining a Board
Directors’ and Officers’
Special Committees (2nd ed)
Where to Find More Information
•
•
•
•
•
•
•
•
•
•
20 Questions Directors Should Ask about IT (2nd ed)
20 Questions Directors Should Ask about Strategy (3rd ed)
20 Questions Directors Should Ask about Executive Compensation (2nd ed)
20 Questions Directors Should Ask about Insolvency
20 Questions Directors Should Ask about Governance Committees
20 Questions Directors Should Ask about Codes of Conduct (2nd ed)
20 Questions Directors Should Ask about the Role of the Human
Resources and Compensation Committee
20 Questions Directors Should Ask about Responding to Allegations
of Corporate Wrongdoing
20 Questions Directors Should Ask about CEO Succession
20 Questions Directors Should Ask about Crisis Management
Director Briefings
• Guidance for Directors: Disclosure and Certification — What’s at Stake
• Guidance for Management: Disclosure and Certification — What’s at Stake
• Board Oversight of Tax Risk — Questions for Directors to Ask
• Shareholder Engagement — Questions for Directors to Ask
• Small Company Boards — Questions for Potential Advisors and Directors
• Sustainability: Environmental and Social Issues Briefing — Questions for
Directors to Ask
• Controlled Companies Briefing — Questions for Directors to Ask
• Diversity Briefing — Questions for Directors to Ask
• Long-term Performance Briefing — Questions for Directors to Ask
Board Bulletins
• Cybersecurity Risk — Questions for Directors to Ask
• Social Media — Questions for Directors to Ask
CFO Series
• Deciding to Go Public: What CFOs Need to Know
49
51
About the Authors
Sarah Keyes, CPA, CA
Sarah Keyes is a Principal in Research, Guidance and Support at CPA Canada.
In this role, she leads research efforts addressing climate change issues and
how they relate to organizational decision-making, reporting and corporate
oversight and governance activities. She is a subject matter expert in climate
change mitigation and adaptation issues, with a deep understanding of the
interconnections between climate change and organizational strategy, risk
and performance.
Sarah started her career at PricewaterhouseCoopers in Audit & Assurance
with a focus on mining and extractive industries. Prior to joining CPA Canada,
Sarah was a national energy consultant for government agencies, provincial
regulators, oil and gas companies, electricity generators and distributors across
Canada. In this capacity, Sarah completed certification in ISO 14064-3 for
greenhouse gas verification and validation. As an energy consultant, she completed a number of projects focused on greenhouse gas emissions strategy
and sustainable supply chain assessments.
Sarah co-managed CPA Canada’s publication “State of Play: Climate-Related
Disclosures by Canadian Public Companies”. She has been quoted as a subject matter expert in several articles related to climate-related disclosures
and carbon pricing in The Bottom Line. Sarah has been a speaker at several
workshops and panels on the topic of climate change, including the University
of Toronto’s Environmental Finance Advisory Committee’s workshop on carbon pricing; the International Economic Forum of the Americas Conference of
Montreal panel on resilient infrastructure and financing; and, the International
Energy Agency’s Nexus Forum on energy sector resilience and adaptation.
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Climate Change Briefing — Questions for Directors to Ask
Alan Willis, CPA, CA
Alan Willis has over twenty five years’ experience as an independent researcher,
writer, consultant and advisor on business reporting outside financial statements,
with a particular focus on measuring and reporting on corporate management
and performance concerning sustainability and climate change. Previously
he was a partner in a major international accounting firm. He has contributed
significantly to the development of international and domestic standards and
guidelines for measuring and reporting on corporate sustainability and climate
change impacts. The integration of financial reporting with sustainability reporting and governance disclosures to improve the usefulness of information
provided to capital markets and investors is an emerging area in which he
is a leading contributor.
For example, he co-authored the original “Climate Change Briefing: Questions
for Directors to Ask”, published in 2009 by the Canadian Institute of Chartered
Accountants (CICA), followed by “Sustainability: Environmental and Social
Issues Briefing: Questions for Directors to Ask”, published by the CICA in 2011.
He co-authored CICA’s Executive Briefing “Climate Change and Related Disclosures”, and its guidance “Building a Better MD&A: Climate Change Disclosures”.
He directed the development of the CICA’s 2002 guidance on preparation
and disclosure of Management’s Discussion and Analysis, and co-authored
CPA Canada’s 2015 briefing publication, “An Evolving Corporate Reporting
Landscape”. Frequently he has been a volunteer judge for the CPA Canada
Corporate Reporting Awards contest.
He was a member of the International Corporate Governance Network’s Committee on Integrated Business Reporting, and of the International Integrated
Reporting Council’s Working Group for development of its 2013 Integrated
Reporting Framework. He served on the founding Steering Committee of the
Global Reporting Initiative (GRI) from 1997 until 2002 to develop the original
GRI Sustainability Reporting Guidelines.
For his contributions and leadership in Canada and internationally in advancing corporate sustainability and the accounting profession’s work in this field,
in 2012 he received the Queen Elizabeth II Diamond Jubilee Medal awarded by
the Governor General of Canada.
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